OECD HomeBrazilThe impact of China and India in Latin America: Challenges and Opportunities

Brazil

The impact of China and India in Latin America: Challenges and Opportunities

Presentation by Angel Gurría, Secretary-General of the OECD at a meeting of Iberoamerican enterprises

Hotel Marriot, Santiago de Chile
8 November 2007

Dear friends,

It is a pleasure to be with you in Santiago de Chile to speak about a subject of growing importance for the global economy: the relationship between China, India and Latin America.

As you know, yesterday we were presenting our report, Latin American Economic Outlook 2008 in ECLAC, in the company of Executive Secretary José Luis Machinea and other eminent Latin American personalities. This new annual publication of the OECD Development Centre analyses crucial aspects of the economic and social development of Latin America. Among them is the impact of the growth of China and India on the development of the Latin American countries.

Latin America’s economic relations with China and India have grown amazingly. Chiefly in the case of China. Latin America’s trade with that country rose from 200 million dollars in 1975 to 40 thousand million in 2004. In that year, some 50% of China’s foreign direct investment was directed to the Latin American region. Although Latin American trade with India continues to be modest (3 thousand million dollars in 2005), it is a constantly growing flow and its potential is enormous.

The Chilean case is an example of growing interaction. Chilean exports to China have tripled since the beginning of 2000. They now account for around 15% of its total exports. At the same time, imports from China now account for 10% of all Chilean imports. In fact, Asia as a whole represents over one third of all Chile’s exports.

The countries of Latin America should see the economic expansion of China and India as a great opportunity for partnership. As we say in our first study on the Latin American Economic Outlook, a considerable part of the structure of the foreign trade of the Latin American region shows a high degree of complementarity with the foreign trade of China and India. This opens up great opportunities for partnership. Indeed, the effects are already beginning to be felt. Much of the growth in exports from Latin America since 2003 is due to the increase in Chinese demand for natural resources.

This sectoral complementarity lessens pressure from China as a source of commercial competition. Chile, Venezuela and Bolivia are among the countries least exposed to commercial competition from the Asian giants. This is no surprise, as natural resources (agricultural products, oil and metals) make up a large part of their exports. Not only do China and India not compete in this field, but they are massive importers of these materials.

However, it should be pointed out that this complementarity does not mean that China is not a competitive challenge to the majority of the region’s exports.

We should not forget that Mexico still produces some 40% of the total exports from Latin America (250 thousand million dollars in 2006), and the majority of these exports are in direct competition with China and in some cases with India. Those Latin American countries whose exports are concentrated in natural resources and primary goods represent a small percentage of Latin American exports: 9% in the case of Venezuela; 7% in the case of Chile and 0.4% in that of Bolivia.

Clearly, as the countries of Central and South America continue to diversify their economies, they should seek to export more manufactured goods and those with added value. In this way, Latin American exporters would be better able to compete with producers in China and India, both for markets and investment. The motor industry in Brazil and software development in Argentina are obvious examples.
The commercial expansion of China and India into the traditional markets of Latin America - the United States, Europe, Japan and, of course, Latin America itself - may even act as a disincentive to sectoral diversification in the region. This could be dangerous. Latin America should not limit its opportunities in Asia to its capacity to supply natural resources.

China and India are also big markets for capital, intermediate and finished goods. Latin America can and must seek to compete in those markets. An additional effects of Latin American investment in partnership with Chinese and Indian companies can be technological modernisation, thus strengthening joint academic cooperation and development research. Now is the time to create the conditions and take the initiative. What is more, there is no alternative.

To be able to take advantage of the enormous opportunities of partnership with China and India, and to face the challenge of competition for markets and investment with these countries, Latin America must meet three great challenges: 1) increase growth and tax collection; 2) invest in modernisation of its communications and transport networks; and 3) expand its capacity for innovation, strengthen its institutions and invest in its most valuable asset, its human capital.

Ladies and Gentlemen,

The economic rise of China and India is both an opportunity and a challenge. Whether it is more an opportunity or a challenge for Latin America will largely depend on the capacity of governments to create an environment which strengthens entrepreneurial competitiveness and leads to greater productivity. This is one of the principal messages of the study which we presented yesterday to ECLAC.

The rise of China and India in the world economy is impressive. Since 2001, the combined growth of these two Asiatic giants provided 30% of the growth in world GDP. It is expected that this contribution will continue to grow in the coming years. Those countries of Latin America which are most successful in linking up with this economic force will be able to tackle their social and economic challenges, strengthen their business sectors and compete in other markets in Europe and North America.

The partnership with China can be a virtuous triangle. It is a historic opportunity. The quality of policies will be key. The OECD and the Development Centre will be there to support them.